Regarding converting from Loan to Equity Shares

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CA.Alka (Querist)
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02 January 2011 Hello Sir

One of my clients has loaned Small Scale Undertaking which is a private ltd co..
Now Company wants to convert the loan to shares

Can you tell me what will be the impact of this transactions ?

According to me,at the time of liquidation,chances are that my client can loose all the money

Being a minority shareholder he might not have any say in the managment

What are the questions that i should ask and what are the conditions that my client should put to safeguard his interest from Companies point of view

Hope my query is solved

Regards
Alka

CA SURENDRA KUMAR RAKHECHA

CA SURENDRA KUMAR RAKHECHA (Expert)
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02 January 2011 First of all -

From Income-Tax point of view; if the company converts the Loan into Share Capital then it amounts to repayment of loan without account payee cheque.

Hence the provisions of Section 269T would attract against the company.

Once the share capital is acquired in a private limited company then be almost sure that the amount will never come back to your client because private limited companies' shares are non transferable.

Further these are not repaid in the life of the company.

Private limited companies hardly pay any dividends hence your client has to forget about the returns on his investment in future.

First of all ensure that you get confirmation from the company in favour of your client that loan is outstanding.

If no interest has been paid by the company to your client; then first of all try to get at least a part of interest from the company to make "live" the loans for the purpose of making claim in the courts of law if it is outstanding for more than three years without receiving any interest.

During negotiation with the company; ask them to consider its proposal if at least interest unpaid is paid by it.

Although it is sure that the company will not be ready to pay anything and it wants to repay the loan by converting it to share capital and to secure itself from any future liabilities.

If a company is unable to pay its lenders and creditors then an application can be moved to wind off the company.

I hope you know the provisions thereof stated in the Company Law itself.

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